Sole trader vs limited company: which is better in 2026/27?

There’s no single right answer, but here’s the short version: being a sole trader is simpler and cheaper to run, while a limited company gives you limited liability and can be more tax-efficient once your profits are high enough – often somewhere above £50,000 a year, depending on how you pay yourself. Since April 2026, higher dividend tax rates have pushed that point up a little, so it’s worth running the numbers for your own situation.

This guide compares both options for the 2026/27 tax year (England, Wales and Northern Ireland – Scottish income tax bands are different).

Sole trader vs limited company at a glance

How sole traders are taxed in 2026/27

As a sole trader you pay Income Tax and National Insurance on your profits (income minus allowable expenses):

On top of that, you pay Class 4 National Insurance of 6% on profits between £12,570 and £50,270, and 2% above that. Class 2 National Insurance is no longer compulsory, though you can pay it voluntarily to protect your State Pension record if your profits are low.

Tax is paid through Self Assessment: the online return is due by 31 January after the end of the tax year, and many people also make payments on account in January and July.

How limited companies are taxed in 2026/27

A limited company pays Corporation Tax on its profits: 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between. Read more in our guide to Corporation Tax deadlines and rates.

You then take money out of the company, usually as a mix of:

• Salary – a cost for the company (so it reduces Corporation Tax), but subject to Income Tax and National Insurance. Employer’s National Insurance is 15% above £5,000 a year, and the Employment Allowance can’t be claimed if the director is the company’s only employee.
• Dividends – paid from profits after Corporation Tax. The first £500 is tax-free (the dividend allowance). From 6 April 2026, dividends are taxed at 10.75% for basic-rate taxpayers, 35.75% at the higher rate and 39.35% at the additional rate.

Many directors take a small salary and the rest as dividends. The right mix depends on your profits, other income and plans – it’s worth getting advice before you decide.

Making Tax Digital: the new rules for sole traders

Making Tax Digital (MTD) for Income Tax started in April 2026. Sole traders and landlords must keep digital records and send HMRC quarterly updates using compatible software if their qualifying income is:

• over £50,000 – from 6 April 2026
• over £30,000 – from 6 April 2027
• over £20,000 – from 6 April 2028 (planned)

The threshold is based on your total self-employment and property income before expenses. Limited companies aren’t part of MTD for Income Tax, which is one reason some growing sole traders choose to incorporate.

Limited liability, credibility and privacy

As a sole trader, you’re personally responsible for any business debts. With a limited company, your personal assets are generally protected – although lenders often ask directors for personal guarantees, and directors can be personally liable in cases of wrongdoing.

Some clients and larger businesses prefer to work with limited companies, and it can make raising investment easier. On the other hand, a company’s directors, shareholders and accounts are on the public register, and every director must now verify their identity with Companies House.

Admin and running costs

A limited company comes with more paperwork every year:

• statutory annual accounts filed with Companies House
• a Company Tax Return (CT600) filed with HMRC
• a confirmation statement filed with Companies House
• payroll if you pay yourself a salary
• your own personal Self Assessment return as a director

That’s why the tax savings need to be big enough to cover the extra costs. With fixed fees from £99 for annual accounts, PeekaBooks keeps the cost of running a small company low – see our prices.

When does switching to a limited company make sense?

A limited company is often worth considering if:

• your profits are consistently above roughly £50,000
• you don’t need to take all your profits out each year
• you want to protect your personal assets
• your clients prefer or require you to work through a company
• your income is approaching the MTD for Income Tax thresholds and you’d rather keep annual reporting

Staying a sole trader usually makes more sense if your profits are modest, you need every pound of profit to live on, or you simply value keeping things simple.

Frequently asked questions

Can I be a sole trader and a company director at the same time?

Yes. You can run a sole trader business and be a director of a limited company at the same time, as long as you keep their income, expenses and records completely separate.

Do I pay less tax with a limited company?

Often, but not always. At lower profits, the extra costs of running a company can outweigh the tax saving. At higher profits – especially if you leave some money in the company – a limited company is usually more tax-efficient.

How do I switch from sole trader to limited company?

Register a new company with Companies House, open a business bank account in the company’s name, tell HMRC you’ve stopped being self-employed, and move your contracts, invoices and any VAT registration across to the company.

Can I switch back from a limited company to a sole trader?

Yes. You’d stop trading through the company, make it dormant or close it, and register as self-employed again. Read how to make a company dormant.

Thinking about going limited?

If you’ve already set up – or are about to set up – a limited company, PeekaBooks handles the yearly accounts for a fixed fee: £199 for non-VAT-registered companies, or £99 if your turnover is under £5,000. Talk to a real person – no jargon, no pressure.